Wary Foreign Backers Hurt Recuperation Of Economy

August 4, 2002|By Louis Uchitelle, New York Times

Foreign investors, who once joined with confident Americans in a wave of spectacular acquisitions and business spending that helped power the 1990s economic boom, are now turning cautious about the U.S. economy. That is compounding the current weakness and making it harder to achieve a robust recovery from the recession.

With fresh acquisitions almost nil, foreign direct investment in the United States -- the technical name for acquiring a company or establishing one -- plummeted last year to $124 billion and started out this year at an even slower pace, the Commerce Department said. That is down from a peak of $301 billion in 2000.

Companies from abroad, after a big expansion here in the past two decades, now have a large-enough presence in the U.S. corporate sector to strengthen or weaken the economy by their behavior. The hope among economists was that they would renew their spending this year, given expectations of a rapid recovery and the bargain prices at which many companies, particularly in the high-tech sector, could be purchased. But it has not happened.

"Foreigners were on the verge of investing again, until their confidence was upended by the corporate scandals and the slide in the stock market," said Mark Zandi, chief economist at Economy.com, a research firm. "And now they cannot get financing, and their own economies back home are weakening."

The steep falloff in foreign direct investment to set up shop in the United States contributed to an even more critical decline in capital investment by foreigners to expand or re-equip their operations here. That spending is off 15 percent to 20 percent, said Joseph Quinlan, a global economist at Morgan Stanley, from its peak of $136 billion in 1999.

"Europeans in particular came headlong into the U.S. market with spectacular acquisitions and huge capital outlays for expansions that have not paid off," Quinlan said. "After that experience, they are going to tiptoe back."

Most foreign companies are pulling back in step with their hosts. Foreign companies seem even less likely to take chances than U.S. companies battered by the collapse of the technology boom and corporate scandals. "That makes the recovery tentative at best," Zandi said.